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#Deflation

Client Talking Points

RUSSELL 2000

The Russell 2000is now down double-digits (-10.2%) from where we called it the all-time #bubble high in small cap illiquidity; volume continues to accelerate on the down moves (Total Equity Market Volume +25.7% yesterday vs. 3 month average); don’t underestimate how hard it is for funds to get out of some of these exposures.

UST 10YR

It didn’t take much (one ISM sequential slow-down print yesterday) to get us paid on the core Long Bond positions; just wait until another bad jobs report and/or multiple GDP misses; Yellen will freak like Draghi has, and there’s no long-term support for the UST 10YR Yield to 1.7% vs. 2.39% last.

OIL

Many bought “consumer stocks” on the falling oil thesis – that didn’t work (Consumer Discretionary, XLY, is -4.6% in the last month with Oil hitting new lows); this is what happened in what we call #Quad4 in 2008 as well; both inflation and growth is slowing, at the same time (we’ll outline this on the Macro Themes Call at 1:00pm EDT).

Asset Allocation

CASH 62% US EQUITIES 2%
INTL EQUITIES 6% COMMODITIES 4%
FIXED INCOME 24% INTL CURRENCIES 2%

Top Long Ideas

Company Ticker Sector Duration
EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). Now that we have our first set of late-cycle economic indicators slowing in rate of change terms (ADP numbers and the NFP number), it's time to really think through the upcoming moves of this bond market. We are doubling down on our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.

TLT

Fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side. In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position.  Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove. 

RH

Restoration Hardware remains our Retail Team’s highest-conviction long idea. We think that most parts of the thesis are at least acknowledged by the market (category growth, real estate expansion), but people are absolutely missing how all the pieces are coming together to drive such outsized earnings growth over an extremely long duration. The punchline of our real estate analysis is that a) RH stores could get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. The consensus is looking for long-term earnings growth of 28% -- we’re looking for 45%.  

Three for the Road

TWEET OF THE DAY

WTI Crude Slips Below $90 for First Time in 17 Months – http://mobile.bloomberg.com/news/2014-10-02/wti-crude-slips-below-90-for-first-time-in-17-months.html

@HedgeyeEnergy

QUOTE OF THE DAY

Perseverance is the hard work you do after you get tired of doing the hard work you already did.

-Newt Gingrich

STAT OF THE DAY

Europe is slowing; Italy leads losers -1.4%, Portugal -1.3% and Russia continues to crash -20.7% year-to-date.


CHART OF THE DAY: #Quad 4 [US growth and inflation (in rate of change terms) slowing at same time]

 

CHART OF THE DAY: #Quad 4 [US growth and inflation (in rate of change terms) slowing at same time] - UNITED STATES


You Will Survive

“Did you think I’d lay down and die? Oh no, not I – I will survive.”

-Gloria Gaynor

 

I’m thinking some of the bond bears need some love this morning, so I thought I’d bring you some of that with Gloria Gaynor’s 1978 Grammy Award Winning disco love track, I Will Survive!

 

“At first I was afraid… I was petrified.

Kept thinking I could never live without you by my side…

But then… I grew strong. And I learned how to get along”

 

‘Oh, as long as I know how to buy the Long Bond, I will get along… I know I will stay alive. And I’ll survive. I will survive! Hey, hey…’

 

You Will Survive - gg1

 

Back to the Global Macro Grind

 

Being born in the 1970s, I still get what living without all of the entitlements in the world means. Savings matter. So does saying thank you to the people who helped bring me along in my #blessed life.

 

One of the greatest gifts I’ve ever received was the time in which I entered this business. From my first trading internship at Williams Trading in the summer of 1998, to my first job @FirstBoston in 1999, I saw both the hedge fund business hockey stick and the Tech #Bubble manifest, then collapse.

 

For my 1st three years on the buy-side, the SP500 was down on the year (2000, 2001, 2002), so I learned how to A) not lose other people’s moneys first, then B) get really long when people hated stocks in 2003-2006. Oh, and then another #Bubble in 2007. Market crash. Epic recovery. Then this…

 

But what is this?

 

I’ll go through what I think this is on our flagship research call (Q4 Macro Themes) today at 1PM EST (ping for access). But to summarize it in hash tag terms, here it is:

 

  1. #Quad4 – where both US growth and inflation (in rate of change terms) are slowing, at the same time
  2. #EuropeSlowing – and why Draghi’s central planning drugs will be hard pressed to arrest it
  3. #Bubbles

 

Oh, yes. #Bubbles.

 

How does your portfolio survive an early cycle global recession as asset prices are deflating and #Bubbles are popping?

 

  1. Raise Cash  (mine is at 62% in my asset allocation model this morning)
  2. Be big on the long side of Long Term Treasuries (TLT, EDV, etc.)
  3. On pullbacks add to Munis, and maybe some Healthcare and Consumer Staples stocks

 

While this call may have sounded aggressive with the 10yr UST yield at 2.63% less than 3 weeks ago, it should have. While I don’t get paid like I used to (just putting the position on, in size), I still wake up at 4AM wanting to win, just like you do.

 

In Signal Terms (Real-Time Alerts), I issued 33 SELL signals (13 BUYS) in the month of September. Most of the sells were in US and European equities. Most of the buys were bonds. And I’d still buy more long-term bonds if there’s another opportunity!

 

When something big and contrarian like this is going your way, you don’t run for the exits during no-volume market head-fakes. You press it (or, as the great Stan Druckenmiller would say, “you spread your wings”).

 

That said, almost 100% of the questions I got in mid-September had to do with:

 

  1. Selling Bonds
  2. Buying Stocks

 

When the right questions should have been:

 

  1. How big do I make the Long Bond position on the recent pullback?
  2. How big do I get on the short side of the Russell 2000’s liquidity trap?

 

Markets don’t go from #bubble mode to buys on a -3.2% correction (that’s where we are for the SP500). However, on a -10.2% draw-down (Russell 2000’s drop from its all-time #Bubble high on July 7th 2014), levered long players start to freak out.

 

As they should.

 

What is the catalyst to reverse the Long Bond’s (TLT) total return of over +18% (vs Russell -7% YTD loss)? I don’t think there is one. If there is one catalyst we have been warning investors of all year long that matters most here, it’s the cycle.

 

That is it. The cycle, slowing.

 

And if one ISM slow-down print (yesterday’s was reported at 56.6 for SEP vs 59.0 for AUG) can smoke the 10yr Treasury Yield down to 2.39% in a day, what do you think the next bad jobs report and/or US GDP miss is going to do?

 

Personally, I don’t say buy FogDog.com or the FireEye on that. Stay with our Macro Playbooks, and you will survive this #bubble.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.36-2.53%

SPX 1

RUT 1067-1118

VIX 14.84-17.93

EUR/USD 1.26-1.28

WTI Oil 89.01-92.14

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

You Will Survive - UNITED STATES


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%

Managing Dovish Paradox

This note was originally published at 8am on September 18, 2014 for Hedgeye subscribers.

“The tools for managing paradox are still undeveloped.”

-Kevin Kelly

 

That’s the opening volley in the latest #behavioral book I have cracked open, The Rise of Superman, by Steven Kotler. It’s a book about flow, as in athletic flow – where world class athletes “completely redefine the limits of the possible.”

 

Managing Dovish Paradox - s2

 

When it comes to central planning limits, there are none (yet). And that’s making your job as a Risk Manager all the more challenging. No matter what you think the Fed, ECB, and BOJ should do, you have to operate within the paradox of what they will do.

 

When you’re forced to operate within a paradox, life gets tougher. By definition, a paradox is a “statement that apparently contradicts itself and yet might be true” (Wikipedia). But what happens when the promised output of the policy within the paradox isn’t true?

 

Back to the Global Macro Grind

 

The good news on the truth is that Janet Yellen actually rolled with it yesterday. When former WSJ reporter (now of The Economist fame) Greg Ip asked her why the Fed continues to cut its growth estimates, this is what Janet said:

 

So, there’s been a little bit of downgrading… you are certainly right, there has been a pattern of forecasting errors.”

 

“So”, what we have within the Policy To Inflate America’s cost of living to all-time highs, is a pattern within the paradox. And it’s that very pattern (forecasting errors) that the entire edifice of consensus clings to like a free-climber to the mother of all centrally planned cliffs.

 

#cool

 

Oh, and to make matters worse, now every Mickey Mouse macro journo in America has figured out what the “dots” are…

 

That’s not good. Because the only thing worse than the buy-side trading on the Fed’s first “rate hike” expectations (which have been wrong all year), is the manic media agreeing that both the Fed and Wall Street consensus growth forecast is going to be accurate.

 

Forget this time – if all of consensus nails US GDP growth being +3% for the next 6 quarters, that would be different!

 

In other news:

 

  1. Fed Keeps ‘Considerable Time’ Pledge As Growth Moderates” –Bloomberg
  2. Asset bubbles absolutely love incremental easing
  3. Ali-bubble (BABA) will be the biggest IPO in US history

 

Fortuitously, we aren’t yet brain-dead from trying to front-run the proactively predictable behavior of the Fed, and we got longer of asset price inflation on red (Monday and Tuesday, we moved to 12 LONGS, 4 SHORTS in Real-Time Alerts and cut our Cash position to 34% in the Hedgeye Asset Allocation Model).

 

But, on the damn dip, we didn’t buy into momentum bubbles or illiquid small cap US equity exposures. We went with:

 

  1. Moarrr #GrowthSlowing Bonds
  2. Stocks that look like Bonds (Utilities)
  3. International Growth Equity exposure (China, India, etc.)

 

Inclusive of the centrally planned pop, the Russell 2000 (small cap Style Factor) is still down -0.9% for 2014 YTD versus a proxy for the #GrowthSlowing Long Bond (TLT) which is +11.1% YTD.

 

No, long-term interest rates haven’t re-tested their YTD lows (they just hit those 3 weeks ago, so now you have the bounce in rates to lower-highs). And, no, the US Dollar hasn’t backed off its multi-standard deviation overbought highs (yet), but give these things time.

 

With time you get more data. And Janet made it very clear yesterday that she doesn’t want to be put in the dot-box; she wants to be “data dependent.”

 

Which, to me, means that if we are right and US GDP slows in Q3 and/or we have one more bad jobs report, market expectations will push those dots out (again). The Fed’s paradox is that the lofty growth expectations embedded in the dots just aren’t true.

 

Our immediate-term Global Macro Risk Ranges are now (we have 12 big macro ranges in our Daily Trading Range product, which includes our bullish/bearish intermediate-term TREND signals for each asset allocation):

 

UST 10yr Yield 2.39-2.62%

RUT 1143-1161

BSE Sensex 26588-27971

USD 83.79-84.83

Pound 1.61-1.64

Gold 1216-1266

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Managing Dovish Paradox - Chart of the Day


October 2, 2014

October 2, 2014 - Slide1

BULLISH TREND

 

October 2, 2014 - Slide2

 

October 2, 2014 - Slide3

 

October 2, 2014 - Slide4

 

BEARISH TREND

 

October 2, 2014 - Slide5

 

October 2, 2014 - Slide6

 

October 2, 2014 - Slide7

 

October 2, 2014 - Slide8

 

October 2, 2014 - Slide9

 

October 2, 2014 - Slide10

 

October 2, 2014 - Slide11
 


THE HEDGEYE MACRO PLAYBOOK

Takeaway: The Hedgeye Macro Playbook is a daily 1-page summary of our core ETF recommendations, investment themes and noteworthy quantitative signals.

CLICK HERE to view the document. In today’s edition, we highlight:

 

  1.  Why investors should continue to decreasing their exposure to DM Equities
  2. What those who must remain invested in this asset class should rotate into
  3. The market dislocation in Hong Kong small-caps

 

Best of luck out there,

 

Darius Dale

Associate: Macro Team


the macro show

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